Making everyone happy is impossible. Pissing them off is a piece of cake. I like cake.

Tuesday, August 24, 2010

Taxing Richard Murphy

Most of us would like to minimise our tax burden and, indeed, the government actually provides a number of ways in which one can do so. One of the single best ways in which one can do so is to incorporate, i.e. to become a company.

How does that work?

Well, you can arrange your affairs in a number of ways but, broadly speaking, one of the best ways is as follows:

incorporate

pay yourself, as a director, a minimal salary (a little under £5,000),

at this level, you still accrue National Insurance credits, i.e. you get money put towards a state pension, but you don't actually have to pay any National Insurance Contributions,

pay your corporation tax

pay the rest of the money out as dividends to shareholders (yourself),

on which you will pay less tax than on ordinary income.

Well, that is the gist of the thing. Obviously, it's not so easy unless you have figures to illustrate the above.

The way that the saving is achieved is fairly straightforward. An individual in self- employment pays three taxes on profit. They are income tax, class 2 national insurance and class 4 national insurance. On £30,000 of profit the income tax is £5,354 this year, class 2 national insurance is £104 and class 4 national insurance is £1,777, a total of £7,235.

If a limited company makes the same profit it can pay its owner in one of two ways. If it paid out all £30,000 as a salary then there would again be three taxes, being income tax (£4,764), employer's national insurance (£2,679) and employee's national insurance (£2,271). That's a total of £9,714, which is £2,479 more than the self-employed pay.

But, if the company is run with strong discipline, and keeps good accounts, then dividends can be substituted for most of the salary paid in the previous example. Just enough salary is still paid to make sure that the director is credited with paying national insurance - currently £4,615 - although no national insurance (or tax) is actually paid on this. That leaves a profit of £25,385 in the company on which corporation tax of £3,654 is paid. This is low because the first £10,000 of profit generated by a small limited company is tax-free.

That means a dividend of £21,731 can then be paid. Because that level of dividend does not take the recipient into the higher rate bracket, he or she does not have to pay any additional income tax on the dividend. The only tax paid will be the company's corporation tax bill of £3,654, which is £3,581 less than the self-employed person pays.

All of this is perfectly legal, of course. And, personally, I'd go further—I'd describe it as perfectly laudable.

After all, arranging your affairs so that the government can steal as little of your money as possible not only leaves you with more cash (which you will spend far more wisely than the state) but also ensures that our lords and master have fewer resources with which to oppress the rest of us.

The trouble is, you see, that Richard Murphy would not agree with you.

Richard, apparently, thinks that you have a moral duty to pay as much tax as you can and that tax avoidance is just as bad as tax evasion.

Hasn’t traded since 2003, but when it was trading it paid out all of its profits as dividends. Incorporation and taking dividends from the company instead of a salary is a classic tax/NI avoidance strategy—as he set out in his Observer article.

I wonder how much of the company’s work his wife did, or whether giving her shares was just a device to save tax by transferring half of the income to her? Did “the rewards paid [to her] match the underlying economic substance” (Ritchie’s own test of whether incorporation is “abusive”)? It seems unlikely that she was generating 50% of the profits from his writing.

It’s difficult to see what legitimate non-tax reason he would have for incorporation, and (as he said in his reply to you) he regularly argues against incorporation—for other people.

Paid out a £12,000 dividend in 2006 (classic NI avoidance strategy, to take money out as NI-exempt dividend rather than salary).

Profits of nearly £13,000 retained in the company (another classic tax avoidance strategy, to delay paying dividends until a year when your income is below the higher rate threshold).

Oh. If we are to continue our speculation about GPs and maternity pay, we might assume that income shifting is now not a useful strategy. For why shift income to someone who is already in the higher tax band? But we do note the other parts of the Observer technique. Low directorial salaries, enough that the director is credited with having paid NI (ie, that State pension accruals continue) without having to actually pay NI and then the rest of the profit being paid out as dividends.

And do note again, the tax free first £10k of profits was abolished in 2006, so at least in 2005 the first £10k of dividends would have been entirely free of either corporation tax or basic rate income tax.

The substance of Ritchie's rebuttal is that he has changed his mind since those dark days when all he wanted to do was to keep his earnings out of the taxman's grip. Alas, he does not elaborate on what caused this Damascene conversion—although I suspect that it has less to do with a soft heart than it has to do with raking in the ackers.

The rest of his post is basically an ad hominem against the entire liberal blogosphere for "seeking to play the man".

First of all – as I’ve often said the issue is one of intimidation – they seek to propagate the message that if anyone stands up to their vicious form of capitalism they will seek to crush them. So much for a belief in liberty! It takes courage to stand up to such behaviour. They know that. They want to stop others entering the fray by behaving as they do.

Ah, yes: we occasionally use some bad behaviour. We do, also, expect people to practice what they preach—and we will tend to look at evidence as to whether they do or not. This is all very intimidating.

But here's the rub, Ritchie: it is central to our philosophy that you be able to do what the hell you want. Sure, we might lob some nasty names at you—for avoiding tax whilst trying to ensure that no one else can, for instance—and we may even point out that, if you think tax is so wonderful, you might like to donate some extra money to the state.

But what we do not do, Ritchie-poppet, is work to ensure that you are forced to do what we want. We don't attempt to influence the state to take more money from you; we don't spend our time lobbying and encouraging others to use force, violence and extortion in order to satisfy our personal philosophies.

Whereas you do, Ritchie—and that is why you are so very dangerous. And it isn't only that your philosophy is, at root, fundamentally evil: it is that you and your kind are pushing at an open door—money is power, and politicians do not need any excuses to give themselves more power.

You see yourself as some sort of crusader, eh? One of a small band of brave warriors making a stand against the evil liberals who would "crush our current democratic way of life in the UK, Europe and beyond".

You deluded fool.

The only things being crushed are the hopes and dreams of individual people who find that, try as they might, their lives are less and less theirs as the months go on: with every passing year, the liberty of individuals is removed as they find themselves more and more slaves of the state.

But I don't expect you to understand this, Murphy: I don't think that you have the intelligence to understand it. But more than that: I think that you are ideologically capable of understanding it.

Because, as far as I am concerned, people (like you) who venerate the will of the demos over the freedoms of the individual—those who believe that the tyranny of the majority always justifies the oppression of the few—are rather more than "flawed like the rest of us": they are evil bastards.

Ah yes it all comes flooding back, those crazy days of late 80's on-site sub-contract/agency work where even the bricky's mates were registered as co-directors of offshore/Jersey based, 20 member, composite companies!I believe it started off with the IT crowd who found it useful in the divorce courts that their declared salary appear as meagre and as close to subsistence level as could be made believable.